Tag Archive for: fracking revolution

Why Frackers Are Returning to Abandoned Oil Patches in Droves

For consumers, high oil prices are a headache; for drillers, they are an opportunity.

Less than two years after the price of oil briefly plummeted to roughly negative $37 a barrel, an oil boom is underway in America—even in places where drilling was all but abandoned two years ago.

“Private oil producers are leading an industry return to places like the Anadarko Basin of Oklahoma and the DJ Basin in Colorado, where drilling had almost completely stopped in mid-2020,” reports The Wall Street Journal.

The Anadarko Basin, for example, has surged from just seven active drilling rigs to 46, according to energy analytics firm Enverus, while the DJ Basin in Colorado saw its number of active rigs jump from four to 15. Meanwhile, Utah’s Uinta Basin and the Powder River Basin in Wyoming, which both saw active rigs fall to zero in 2020, have seen rigs increase to roughly a dozen.

What is driving frackers back to abandoned oil patches? It’s not newly discovered shale oil. Rather, it’s high oil prices.

The price of oil has surged in recent months, increasing from roughly $65 a barrel to the low-to-mid $90s in recent weeks. (The price of crude closed at just under $94 a barrel Monday.) The prices—which recently hit a seven-year high—are attracting drillers to shale patches that are more expensive to drill and thus require higher prices to be profitable.

For consumers, high oil prices can be a headache, because they result in higher gasoline prices. But for drillers, high oil prices mean more potential for profit.

Klee Watchous, president of the Kansas-based company Palomino Petroleum, says the higher prices have marked a turnaround for his small company and the surrounding communities where it operates.

“After many years of fighting this low oil-price situation, it feels great,” Watchous told the WSJ. “The cycles of boom and bust have been part of the oil-and-gas industry for decades, and no one knows how long it will last.”

Watchous is looking to seize on the higher prices to venture into Illinois in 2022, a state few companies have sought to tap in recent years.

Some might begrudge oil companies like Palomino profiting from high oil prices, but it’s precisely their desire for profits that can help tame surging oil prices. As oil companies expand their production, they increase the supply of oil, which inevitably puts a downward pressure on prices. It’s a perfect example of Adam Smith’s insight that free markets harness the self-interest of individuals to serve the whole.

“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security,” Smith explained in The Theory of Moral Sentiments; “and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

High prices do two important things in an economy. First, they encourage people to conserve scarce resources. Many people love steak and lobster, but few of us eat it every week or every month because it’s quite expensive. In other words, the high price discourages us from demanding steak and lobster. But that’s not the only function of the high price. It also encourages lobster trappers and beef companies to bring more of these products to market in pursuit of profit. Together, these two mechanisms help make scarce resources more abundant.

Price is arguably the simplest and most vital principle in economics. It signals both scarcity (to consumers) and opportunity (to entrepreneurs). Yet the economist Thomas Sowell has noted the importance of prices is often misunderstood by activists and politicians.

“Prices play a crucial role in determining how much of each resource gets used where and how the resulting products get transferred to millions of people,” Sowell wrote in Basic Economics. “Yet this role is seldom understood by the public and it is often disregarded entirely by politicians.”

It’s worth noting that the word “price” never appeared in President Joe Biden’s 2020 executive order killing the Keystone XL Pipeline, an oil pipeline system between Canada and the US commissioned in 2010.

Nixing the 1,700-mile pipeline, which could have carried roughly 800k barrels of oil a day from Alberta to the Texas Gulf Coast, did nothing to reduce the pain at the pump consumers are feeling today, with gasoline currently at more than $3.50 a gallon. But that was expected.

What perhaps was unexpected was that higher prices would result in additional fracking—a process many contend is harder on the environment than regular drilling, and a practice Biden has said he wants to “move gradually away from.”

So while the role prices play in an economy is one of the most basic lessons in economics, politicians of every stripe would do well to remember one of the greatest fallacies: overlooking secondary consequences.


Jon Miltimore

Jonathan Miltimore is the Managing Editor of FEE.org. His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune. Bylines: Newsweek, The Washington Times, MSN.com, The Washington Examiner, The Daily Caller, The Federalist, the Epoch Times.

RELATED ARTICLE: Oil Soars Beyond $100 Per Barrel For The First Time Since 2014

EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Why do we have an Oil Glut?

The world is awash in oil and gas. Amazing.  Less than two decades ago in 1998, the predictions were by this time in 2016 oil production would be past its peak. In fact the gloom and doom experts were called Oil Peakists. Note this from Science magazine back in 1998:

From Science magazine’s “The Next Oil Crisis Looms Large—and Perhaps Close,” Aug. 21, 1998:

This spring . . . the Paris-based International Energy Agency (IEA) of the Organization for Economic Cooperation and Development (OECD) reported for the first time that the peak of world oil production is in sight. Even taking into account the best efforts of the explorationists and the discovery of new fields in frontier areas like the Caspian Sea . . . sometime between 2010 and 2020 the gush of oil from wells around the world will peak at 80 million barrels per day, then begin a steady, inevitable decline, the report says.

However, technology, especially here in the U.S., relegated that prediction to the proverbial dust bin of history. With the private developments of  revolutionary shale fracking and horizontal drilling technology, vast new energy resources were opened up in places like North Dakota, Ohio, Pennsylvania and even in the older Permian field in West Texas. The U.S. is now pumping 9 million barrels of oil a day, and trillions of cubic yards of gas. We are no longer dependent on importing Middle East oil. In fact much of the oil that we import comes from our neighbors Canada and Mexico.

In the wake of lifting sanctions against nuclear Iran, oil is beginning to flow again to the European Union from Tehran which says it could add another 500,000 barrels in production this year.  U.S. oil is also flowing to Europe now that the 43 year old ban on oil exports was lifted and signed in law late in 2015. The first shipment of sweet crude drawn from the Eagle Ford Shale field in South Texas left the port of Corpus Christi, Texas on New Year’s eve and landed at the port of Marseilles on Friday. Another shipment out of Houston made it to Rotterdam on Thursday. A third one out of Houston is on its way to Marseilles. The oil is the equivalent of the so-called Saudi light or sweet crude which doesn’t require as much refining producing profit margins for the refiners.

So, why do we have this glut? 

The world’s economies are not growing as fast or rather slowing down, especially in the big consumer of raw materials and energy, China.  China’s economy and trade is impacting on those exporters of commodities like oil, gas,  copper, aluminum  and  iron ore like Australia,  Brazil, Canada,  Russia, Venezuela  and African countries. Where China was growing at a purported 10 percent plus, annually, the evidence is it has fallen to less than a third of that towering inflated level. We have come to realize those growth estimates were based on questionable figures  prepared by the Chinese government.  Some economic experts suggest the annual growth in GDP may be less than three percent.  So with that news came the sudden plummeting in the world trading markets for commodities, especially oil.

There is  also the great geo-resource political game in the Middle East going on between Saudi Arabia and Iran, and let’s not forget Russia.  Saudi Arabia as the keystone in the OPEC oil Cartel is not listening to the complaints of the other members of the group at meetings in Vienna demanding that it reduce domestic production. It is pumping oil and still making money, because it costs less than $5 a barrel. This despite a yawning budget deficit of $98 billion. The Saudis have an estimated $600 billion in hard currency reserves, which provides a cushion to ride out the geo-political storm. They are using the oil weapon to beat back competitors including Iran across the Persian Gulf, Russia which  has military in Syria supporting the Assad regime, and  the newly resurgent producer, the US.   Russia, as Shoshana Bryen of the Washington, D.C.-based Jewish Policy Center pointed out in a recent interview, mispriced its budget at $119 a barrel of oil, then redid the numbers at $87 dollars only to see it plummet to less than $30 at one point.

So what is the impact here in the U.S.?

When was your last trip to fill up your car at the gas station?  Here on the Gulf Coast in the U.S., regular unleaded gas is currently selling for less than $1.80 a gallon.  That means savings to consumers who appear to be putting away the difference awaiting a return to a more confident economy.   Diesel that at one point was priced at nearly $1 dollar a gallon above gasoline has shrunk to less than ten cents a gallon differential. That means that the cost for moving shipments via long haul truckers has gotten cheaper. It means that jet fuel cost is less reflected in the huge profits being declared by the major airlines. Some of that may be due to the lagging airline ticket surcharges that remain in place.  However, the drop in oil production is also impacting the profit margins of rail carriers who minted money from train loads of combustible leaving the Bakken formation in North Dakota. The drop in oil prices occasioned by the glut also means that the cost of petro chemical feed stocks is enhancing profit margins for plastics,.

Remember, the discussion about lifting the 43 year old oil export ban?

One of the by-products of that was the convergent pricing of U.S. crude has converged with world pricing.  If you went onto the COMDEX oil trading floor in lower Manhattan, you would see traders vying for futures contracts in West Texas Intermediate (WTI) versus Brent-the so-called North Sea crude oil benchmark. The lifting of the oil export ban in the U.S. virtually eliminated the difference making Brent the world standard.  As of Friday, January 22, 2016 WTI was $32.19 per barrel for March 2016 deliveries, a 9.0 % jump, and Brent priced out of the London ICE was $32.18. Heavier grades like Canadian Tar sands or Venezuelan heavy sulfur crude require more refining to produce various products. These grades actually sell at discounts from those benchmarks by as much as five dollars.

Can we expect the oil glut to last? Hardly. The current excess supply will work itself off and oil futures will gradually begin to rise again. That will bring rigs on stream here in the U.S. to start producing again, it may cause Iran to produce more than the declared 500,000 barrels  annually and the Saudis would just be minting more billions to add to its hard currency reserves. However, by mid century those fabled Saudi sweet crude reserves may likely begin to tail off. Energy, whether oil or gas will reflect the cyclical demands of the world economies.  The U.S. stands in pretty good shape to weather the current volatility in trading markets; thanks to technology, entrepreneurial prowess and the lifting of the oil export embargo. Don’t panic and consider investing in contrarian values in the equity and debt markets. That is what the long term value investors do. They buy when values are relatively cheap compared to long term returns.

EDITORS NOTE: This column originally appeared in the New English Review. An earlier version was published in the Newsletter of the Lisa Benson Show National Security Task Force Newsletter, January 23, 2016.