Bloomberg - Gary Shilling on Oil Prices

Hi all,

I found this piece by Gary Shilling interesting … I don’t have much riding on oil & gas except for a tiny investment in GTLS (One I have been thinking of getting out of?) and another one in PSIX (which is more of a clean energy investment than an oil & gas investment).

Some exerts … and the link is below.

Last month, Wood Mackenzie, an energy research organization, found that of 2,222 oil fields surveyed worldwide, only 1.6 percent would have negative cash flow at $40 a barrel. That suggests there won’t be a lot of chickening out at $40. Keep in mind that the marginal cost for efficient U.S. shale-oil producers is about $10 to $20 a barrel in the Permian Basin in Texas and about the same for oil produced in the Persian Gulf.

Also consider the conundrum financially troubled countries such as Russia and Venezuela find themselves in: They desperately need the revenue from oil exports to service foreign debts and fund imports. Yet, the lower the price, the more oil they need to produce and export to earn the same number of dollars, the currency used to price and trade oil.…



The article does present a view that is different from consensus (which is always a good thing to read IMO), but the author doesn’t address the production profile for shale plays. The declining production yield curve is a big piece to the puzzle.

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While "shale"oil wells (the productive formation is usually not shale) mostly has a rapid decline in production most US oil and overseas oil comes from conventional untracked vertical drilling and these wells usually have much slower depletion rates. And oil is fungible to a certain extent. There are too many variables to figure out, plus there is a Soros type reflexivity going on.
Predicting oil prices is an exercise in futility, if you get it right it was probably luck at work.

The only thing you can bet sure about is the very long term, the amount of oil produceable at any given price is a finite number. More oil is being made by nature all the time, but it will take millions of years to form , so available oil and NG will gradually get harder to find and more expensive to produce. Unless demand shrinks commensurately, prices are likely eventually to go up.

Since oil is used almost exclusively in transportation, BEV are the wild card here. Something not in the oil supply demand battles that have taken place since the 1860’s. It will take decades for BEV and FCV to replace the ICE. I suspect that distributed solar will start replacing fossil fuel central power before various forms of electric car replace the ICE car. Both will have a serious impact on the usage (demand) of fossil fuels, and thus the price.

So a group of nested revolutions are coming to the world But picking the speed of this and the eventual stock market winners is tricky.