In the 20-year timeframe that would be great (a decarbonized economy), but short-term, it's really important that the US doesn't depend on Saudi Arabia as a sole oil producer, and that means maintaining some level of oil pumping infrastructure
SA, Russia, and Venezuela are not the international players you want to have leverage over US foreign policy. If we let a weird unexpected market rout (like covid) wipe the shale producers out entirely, we really screw ourselves into letting SA call the shots on the world stage. Cuz you know SA and Russia are NOT going to let their pumping capacity collapse.
(To be clear I'm not arguing for a bailout to prevent banks or investors from taking haircuts on the investments — those haircuts have to happen. But "letting all the jobs go" means letting the companies dissolve, vs reorganize, and that's not a good idea, IMO).
It would crush the economy. Everything still runs on oil except the fraction of Teslas out there. Not to mention everything made of plastic and other oil derivatives.
You bring up a good point. My initial thought was that we would switch over to clean energy but to power the whole us is probably not feasible in the near term
It's important to note that energy subsidies aren't inherently pro fossil fuels or anti green energy.
Their only priority is to ensure that a given percentage of energy demand is met by domestic (or closely allied) suppliers. There are both National Security and Economic reasons for this. Not only does it prevent war by insuring no enemy thinks they can quickly force a surrender by cutting off energy supplied, but it also helps guard against things such as the OPEC oil shock of the '70s.
What energy subsidies are trying to avoid is a scenario where the majority of fossil fuel is produced in the countries where it is cheapest, such as the Middle East or Russia. Such a scenario would give those countries a massive amount of economic power.
If you want energy subsidies to not go to fossil fuels, you simply need to eliminate demand for fossil fuels.
As fossil fuel demand drops, the energy subsidies assigned to them will also drop. They are only trying to maintain a domestic percentage. So cut domestic demand by 50% and fossil fuel subsidies will also drop by roughly half.
But subsidies could have pushed certainly wind generation 50 years ago, rather than push oil and require a huge navy and military to secure our overseas oil interests.
Solar probably could have been pushed substantially as well with better research funding.
Battery storage probably could have been pushed for practical EVs earlier as well.
Sure there's a lot of monday morning quarterbacking there, but we are in a major hole with GHG levels in the atmosphere, and our oil and gas friendly policies over the last century are a major cause.
Accounting for reverse splits, etc, their stock was worth about $12,000.00 in 2008 when oil was really expensive. Trading at $11 as of last Friday. Was at $175 in January of this year.
This has nothing to do stylistically, with how people post on Wall Street bets and its pretty reasonable economic commentary given the events of the last few weeks.
What does this say about the pricing of that stock if anything? Is there a way to say which investors got screwed the worst? What year should you have stopped buying and what year should you have dumped assuming a 1 (or 5) year hold?
The majors rarely buy when they should, they only buy when they shouldn't (price based acquisition fever). Happens over and over again, with the latest being Occidental and Anadarko. The industry is almost universally stupid when it comes to acquisitions.
Notice Exxon and Chevron didn't launch any big acquisitions during the extreme implosion in the industry with the pandemic. They always go into hunker down mode at the wrong time. Why haven't they stepped in to take out Occidental + Anadarko (the Anadarko deal was valued at a comical $55 billion)? They want to wait until the combination's current $16b market cap rebounds back to $35b (and then pay $42b for the deal), so they can be sure of what they're doing. And since Occidental paid so much for Anadarko by itself, they'll pat themselves on the back that they're paying a good price.
Exxon bought XTO Energy (natural gas heavy) in Dec 2009 in an all-stock deal initially valued at $41b (plus an assumed ~$11b in debt). They bought them shortly after the natural gas price bubble crashed (I'm sure they thought it was a good deal) and right before shale production would permanently bury natural gas prices. Another classic poorly timed acquisition disaster in the industry. Analysts at the time of course overwhelmingly praised the deal as smart (calling XTO's price cheap).
If anyone scoops up Chesapeake coming out chapter 11, most likely it will be private equity types specializing in energy markets. Then Exxon will buy it from them at a huge price increase in seven or eight years, right before an oil crash.
It honestly feels pretty amicable. The lenders are working with the company ("The company has entered into a restructuring support agreement, which has the full backing of lenders to its main revolving credit facility"), and the company is reorganizing, clearing some debt, but staying operational.
Which is pretty great for the US all-told. The US doesn't have to pump a barrel of shale oil to keep Saudi Arabia, Venezuela, Russia, and other petty despot oil states on the defensive, to stay independent of their whims. As long as the US has the ABILITY to spin up pumping once oil hits $50, who cares whether we are actually doing it?
So overall, seems like fine news to me. Some banks are taking a haircut (better them than more taxpayer/bailout money). The infrastructure and organization sticks around. America stays independent of petty oil tyranny. Good news for America all around.
Not great for the climate, unfortunately. If fossil fuel companies can just go bankrupt and clear all their debt while continuing to operate without skipping a beat, it's nigh impossible for something like renewable energy to compete.
Thanks for explaining. Does this mean that each time a “day trader” makes a sale of $N, the minimum cash they hold over the next 3 days must be at least $N? Or does the exchange not make the cash available for 3 days?
Also, can the same stock be re-bought within 3 days?
I’ve seen a lot if different takes on these issues, and an unsure what to believe.
When you sign up for a brokerage account, you select whether you want a “cash” or “margin” account. In a margin account, the brokerage essentially loans you the money until the sale clears.
Day traders use margin accounts.
You can indeed buy the same stock back, but it has tax implications. Look up “wash rules”.
When stocks "disappear" like that, it's usually due to a split. CHK recently had a 1 for 200 split, so unless you had more than 200 shares of CHK then your broker (Robinhood for gp) would sell them for you.
Saudi Arabia can get cheap oil, but the US hit peak cheap oil along time ago. Shale needs oil prices above $60/barrel.
Energy input is an interesting way of looking at oil. In 1930 we used 1 barrel of oil to obtain 100 more. With shale you are getting closer to spending 1 barrel of oil to get 3. https://youtu.be/WeBtdwPpTQM?t=450
That's not quite true. The cost of producing shale oil has continued to fall. It started out high, but the industry breakeven price is now $48, and some producers can be profitable as low as $31.
agreed. and while the cost of Saudi production is cheap, running the Saudi state is not. In the US, a sustained low oil price leads to a few bankruptcies. In Saudi, it will lead to political revolution.
While I think you have an interesting underlying point ("there's an enormous amount of USD used to transact oil") I don't think everyone getting out of oil would cause a revolution in the US. The US and the dollar abroad are involved in quite a bit more than oil.
I do wonder what percentage, very roughly, of the money supply that is, and what the actual consequences of selling that would be. Anyone have some rough estimates or places to look?
The best argument for low oil prices crashing the US economy would be in any changes to US debt interest rates. While this would certainly change a lot about US politics and finances, one could not count on continuing to borrow indefinitely at sub-inflation levels, America could almost certainly pay it off if it found the will to do so. The fact that America has a large and diverse non-oil economy that would be strengthened by dropping energy prices is certainly a factor.
KSA meanwhile is a rentier state, with 67% of the budget coming from oil sales. Their non-oil economy is badly underdeveloped, and they depend almost entirely on oil money to keep their population fed, occupied, and suppressed. You’ll notice that I said “occupied”, since at a first glance the Saudi economy doesn’t actually include Saudis; 2/3rds of those employed in KSA aren’t Saudi (90% if you exclude oil), and only 30-40% of working age Saudi’s in KSA either have or want a job.
If the oil money were cut off from KSA, the lifetime of that regime would be measured in hours.
> If the oil money were cut off from KSA, the lifetime of that regime would be measured in hours.
Are you sure about that ? both Putin and Xi would jump to make a deal for future oil exports in exchange for meeting Saudi social / security needs.
> America has a large and diverse non-oil economy
So does India, China <-- not superpower or depend heavily of foreign borrowing.
Pulling the plug on the dollar would materially make Americans poorer, independent analysts have put 50% of the value of the dollar arising from WRC status.
Americans can't handle that level of lifestyle change, without it being turned into a revolution.
Russia is an exporter themselves, suffering greatly right now due to the low oil price. They are no less dependent on oil for their economy, and some say regime change is closer now than it has been in a long time.
Xi is different, but its a big question whether the Saudis would agree to their usually awful terms.
Why would Americans turn against their own state instead of just fighting a war with Saudi Arabia? If a leadership change is all it takes then Americans can just voice their opinion in the next election.
our "revolution" would just involve voting in Bernie Sanders at the ballot box. In Saudi, it would literally be an Arab Spring type event. It's no coincidence that the Arab Spring corresponded with low energy prices.
Another interesting tidbit: when Saudi allowed women to drive, oil was in another mini-"bust" cycle. A half-measure to stave off larger social change.
> Are you sure about that ? both Putin and Xi would jump to make a deal for future oil exports in exchange for meeting Saudi social / security needs
Xi maybe, but that would be a lot of money for future benefits; I doubt China can afford it.
Putin is aligned with Iran, Saudi’s enemy, and would also be in a lot of trouble in a hypothetical collapse in oil prices. He’d be in no place to help.
Also, the Russian economy is actually kind of small; Italy would actually be better positioned financially to bail out KSA than Russia.
> Americans can’t handle that level of lifestyle change without it being turned into a revolution.
Debatable. But between “My lifetime earnings have been halved” and “I can’t get food tomorrow”, I’ll tell you which one will trigger a revolution faster.
That’s silly. Low oil prices are great for America’s economy, and oil has a lot less to do with the value of the dollar then our other exports, or our tax/regulatory environment.
Here's published numbers where Exxon only needs $26.90 to make a profit on New Mexico shale[1]. US producers are much more globally competitive than the general media narrative (I'm mostly a tech person in Texas but I socialize with energy folks a good bit).
I wrote this elsewhere, but I'm sure such prices require a certain amount of demand to keep the scale of production high enough.
But if demand falls that saudi oil can handle all the demand, and the Saudis know that wind/solar/EV is going to kill off oil so they better make money while they can (which is why they sold off Aramco), then they will sell what they can to keep it under what is profitable for the US alternative sources.
Hmm it appears that the cost figures cited are operational costs only and do not including the cost of capital and the cost of debt. If your operation just breaks even on operational costs, it does not have a long term future.
Look at all the big shale producers, their stock prices are top left to bottom right. Burning capital. This is not going to last and can only continue in the short term because of near-zero interest rates. Zero rates allow you to kick the can down the road .. for a while.
My model of these companies is that the product they are producing is not oil but the false promise of profits, sold to gullible stock buyers. Along the way some of the money is siphoned off as executive salaries and bonuses.
Reminiscent of many of the dot.com / dot.scam outfits back in the 1990s.
The geopolitical implications of a low priced oil will be seen for many years to come.
The developing nations are already suffering greatly. That’s why the recent conflict between india and China has occurred. Watch #boycottchina happening in other countries besides India.
Can you imagine being Iran, watching your economy being destroyed simultaneously by your biggest enemy, US, via sanctions. Then watch your countrymen get destroyed by your biggest ally, China, via Muslim concentration camps and coronavirus? And what if this leads to a rogue state where it attacks every ship coming out of Hormuz? And it leads to a sudden spike in oil price?
> The developing nations are already suffering greatly. That’s why the recent conflict between india and China has occurred. Watch #boycottchina happening in other countries besides India.
What are you saying here ? India-China conflict occurred due to the impact of low-priced oil ? This is a silly thing to say. India, China, Japan etc. benefit vastly from this price movement. India is infact now supplementing for lost tax revenue (by its stupid overreactive policies) by increasing petrol prices.
The only ones who lose are countries like Russia and those in the Middle East that rely hugely on oil/gas, and perhaps the US, partly due to the Shale oil bankruptcies, but I imagine, vastly more, due to the weakening of the petro-dollar, esp. in a time of unhinged money-printing.
*Countries like Venezuela and Brazil have frittered away their oil-treasures for crony-socialism, so I don't imagine there is much other bad-news for them.
Read into the chabahar/ gwadar battle. While China has a smaller stake in chabahar India has a huge one. Lower prices may effect development of those ports and gas supply.
It’s interesting how companies can file for bankruptcy and can come out of it with not much damage done to the company. At a personal level you are essentially screwed for 7 years and even after that I think some companies don’t employ you.
Can anyone point to any resources that provide a good introduction to the bankruptcy process in the US?
Hostess "recovered" after their bankruptcy by selling assets to a new company (the new company is now Hostess Brands and the old one is "Old HB Inc"). The good parts of the company are in a new shell, and the unit economics allowed them to continue operation. All of the liabilities are in the old company.
Many investors and pension holders took a loss, and many employees lost their jobs.
Companies that file for bankruptcy don't have much damage done to operations and the organizational structure because its ability to keep operating is usually the highest value outcome. That is- the company's continued operations bring in more money than selling off the assets. Most corporate bankruptcy is about not making enough money to pay their outstanding debts, not having money losing operations.
Typically the owners lose all their investment and the debtors lose some of their investment. The debtors, in order of priority, are given ownership of the company by the court.
The ability for ownership to exist separately from the "operating" company, for the owners to only be liable up to losing their investment, not more, and for the management and employees not to directly lose money is sorta the "why" for corporations to exist.
Lots of countries don’t have restructuring codes. When their corporations go bankrupt, the assets automatically go to the creditors and/or are liquidated.
Companies are owned by shareholders, and it's the shareholders who lose in bankruptcy. Suppose a company that is owned by group A is worth $X and finds itself in $X worth of debt it can't pay to group B. Then the company declares bankruptcy and goes to bankruptcy court, and after all of the facts are worked out (It really is owned by group A, it really is worth $X, etc) ownership of the company would be awarded to group B.
It's often a more messy process than this, but there's no reason a company going through bankruptcy would necessarily be impacted in any way aside from an ownership change.
I assume you are a brit like me? US bankruptcy (personal and corporate) is very different to our system. Its much softer on the bankrupt person. I think its a better system because you can take a risk on trying something and if it fails still have a normal life.
People talk all the time about ascendant technologies and industries riding economies of scale, such is happening with wind / solar / batteries / EVs.
But people don't talk about the fact that the opposite can occur with industries.
Petroleum has ridden huge economies of scale to the point their refining facilities are massive, their transport ships are massive... and there is bloat.
But more importantly, most of the cheap extraction oil is gone. The current economies of scale were keeping shale/tar sands extraction with terrible EROEI profitable. But a contraction in demand makes those unable to be used. A compression in demand will make refineries less profitable, and tankers less profitable.
And this is a cycle of destruction, just like economies of scale boosting rising technologies is an enhancing feedback cycle.
Oil and Gas is going to be rocky fall down a steep mountain.
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[ 3.8 ms ] story [ 144 ms ] threadTexas is going to be hard hit this recession.
SA, Russia, and Venezuela are not the international players you want to have leverage over US foreign policy. If we let a weird unexpected market rout (like covid) wipe the shale producers out entirely, we really screw ourselves into letting SA call the shots on the world stage. Cuz you know SA and Russia are NOT going to let their pumping capacity collapse.
(To be clear I'm not arguing for a bailout to prevent banks or investors from taking haircuts on the investments — those haircuts have to happen. But "letting all the jobs go" means letting the companies dissolve, vs reorganize, and that's not a good idea, IMO).
Always neat seeing how much cheaper gas costs in the US compared to Canada, meanwhile the rhetoric would cause you to think otherwise
Most stuff runs on electricity.
60% or more is generated by oil + gas.
Source is an NREL research paper I read ~7 years ago, can’t find the link at the moment.
Their only priority is to ensure that a given percentage of energy demand is met by domestic (or closely allied) suppliers. There are both National Security and Economic reasons for this. Not only does it prevent war by insuring no enemy thinks they can quickly force a surrender by cutting off energy supplied, but it also helps guard against things such as the OPEC oil shock of the '70s.
What energy subsidies are trying to avoid is a scenario where the majority of fossil fuel is produced in the countries where it is cheapest, such as the Middle East or Russia. Such a scenario would give those countries a massive amount of economic power.
If you want energy subsidies to not go to fossil fuels, you simply need to eliminate demand for fossil fuels.
As fossil fuel demand drops, the energy subsidies assigned to them will also drop. They are only trying to maintain a domestic percentage. So cut domestic demand by 50% and fossil fuel subsidies will also drop by roughly half.
Solar probably could have been pushed substantially as well with better research funding.
Battery storage probably could have been pushed for practical EVs earlier as well.
Sure there's a lot of monday morning quarterbacking there, but we are in a major hole with GHG levels in the atmosphere, and our oil and gas friendly policies over the last century are a major cause.
Tomorrow hits you hard. Fat tails are a thing.
Get off your high horse.
https://www.stocksplithistory.com/chesapeake-energy/
Notice Exxon and Chevron didn't launch any big acquisitions during the extreme implosion in the industry with the pandemic. They always go into hunker down mode at the wrong time. Why haven't they stepped in to take out Occidental + Anadarko (the Anadarko deal was valued at a comical $55 billion)? They want to wait until the combination's current $16b market cap rebounds back to $35b (and then pay $42b for the deal), so they can be sure of what they're doing. And since Occidental paid so much for Anadarko by itself, they'll pat themselves on the back that they're paying a good price.
Exxon bought XTO Energy (natural gas heavy) in Dec 2009 in an all-stock deal initially valued at $41b (plus an assumed ~$11b in debt). They bought them shortly after the natural gas price bubble crashed (I'm sure they thought it was a good deal) and right before shale production would permanently bury natural gas prices. Another classic poorly timed acquisition disaster in the industry. Analysts at the time of course overwhelmingly praised the deal as smart (calling XTO's price cheap).
If anyone scoops up Chesapeake coming out chapter 11, most likely it will be private equity types specializing in energy markets. Then Exxon will buy it from them at a huge price increase in seven or eight years, right before an oil crash.
Which is pretty great for the US all-told. The US doesn't have to pump a barrel of shale oil to keep Saudi Arabia, Venezuela, Russia, and other petty despot oil states on the defensive, to stay independent of their whims. As long as the US has the ABILITY to spin up pumping once oil hits $50, who cares whether we are actually doing it?
So overall, seems like fine news to me. Some banks are taking a haircut (better them than more taxpayer/bailout money). The infrastructure and organization sticks around. America stays independent of petty oil tyranny. Good news for America all around.
This is what bankruptcy, done right, is for!
Also, can the same stock be re-bought within 3 days?
I’ve seen a lot if different takes on these issues, and an unsure what to believe.
Day traders use margin accounts.
You can indeed buy the same stock back, but it has tax implications. Look up “wash rules”.
Energy input is an interesting way of looking at oil. In 1930 we used 1 barrel of oil to obtain 100 more. With shale you are getting closer to spending 1 barrel of oil to get 3. https://youtu.be/WeBtdwPpTQM?t=450
Without the need for holding dollars, rest of the world pulls the plug on the American financial system.
I do wonder what percentage, very roughly, of the money supply that is, and what the actual consequences of selling that would be. Anyone have some rough estimates or places to look?
The best argument for low oil prices crashing the US economy would be in any changes to US debt interest rates. While this would certainly change a lot about US politics and finances, one could not count on continuing to borrow indefinitely at sub-inflation levels, America could almost certainly pay it off if it found the will to do so. The fact that America has a large and diverse non-oil economy that would be strengthened by dropping energy prices is certainly a factor.
KSA meanwhile is a rentier state, with 67% of the budget coming from oil sales. Their non-oil economy is badly underdeveloped, and they depend almost entirely on oil money to keep their population fed, occupied, and suppressed. You’ll notice that I said “occupied”, since at a first glance the Saudi economy doesn’t actually include Saudis; 2/3rds of those employed in KSA aren’t Saudi (90% if you exclude oil), and only 30-40% of working age Saudi’s in KSA either have or want a job.
If the oil money were cut off from KSA, the lifetime of that regime would be measured in hours.
Are you sure about that ? both Putin and Xi would jump to make a deal for future oil exports in exchange for meeting Saudi social / security needs.
> America has a large and diverse non-oil economy
So does India, China <-- not superpower or depend heavily of foreign borrowing.
Pulling the plug on the dollar would materially make Americans poorer, independent analysts have put 50% of the value of the dollar arising from WRC status.
Americans can't handle that level of lifestyle change, without it being turned into a revolution.
Xi is different, but its a big question whether the Saudis would agree to their usually awful terms.
Another interesting tidbit: when Saudi allowed women to drive, oil was in another mini-"bust" cycle. A half-measure to stave off larger social change.
Xi maybe, but that would be a lot of money for future benefits; I doubt China can afford it.
Putin is aligned with Iran, Saudi’s enemy, and would also be in a lot of trouble in a hypothetical collapse in oil prices. He’d be in no place to help.
Also, the Russian economy is actually kind of small; Italy would actually be better positioned financially to bail out KSA than Russia.
> Americans can’t handle that level of lifestyle change without it being turned into a revolution.
Debatable. But between “My lifetime earnings have been halved” and “I can’t get food tomorrow”, I’ll tell you which one will trigger a revolution faster.
[1] https://www.cnbc.com/2020/03/16/reuters-america-analysis-few...
But if demand falls that saudi oil can handle all the demand, and the Saudis know that wind/solar/EV is going to kill off oil so they better make money while they can (which is why they sold off Aramco), then they will sell what they can to keep it under what is profitable for the US alternative sources.
they barely sold off a 1.5% stake, and sold it to their own citizens, who are "forced" to buy it.
Look at all the big shale producers, their stock prices are top left to bottom right. Burning capital. This is not going to last and can only continue in the short term because of near-zero interest rates. Zero rates allow you to kick the can down the road .. for a while.
My model of these companies is that the product they are producing is not oil but the false promise of profits, sold to gullible stock buyers. Along the way some of the money is siphoned off as executive salaries and bonuses.
Reminiscent of many of the dot.com / dot.scam outfits back in the 1990s.
The developing nations are already suffering greatly. That’s why the recent conflict between india and China has occurred. Watch #boycottchina happening in other countries besides India.
Can you imagine being Iran, watching your economy being destroyed simultaneously by your biggest enemy, US, via sanctions. Then watch your countrymen get destroyed by your biggest ally, China, via Muslim concentration camps and coronavirus? And what if this leads to a rogue state where it attacks every ship coming out of Hormuz? And it leads to a sudden spike in oil price?
We live in interesting times
What are you saying here ? India-China conflict occurred due to the impact of low-priced oil ? This is a silly thing to say. India, China, Japan etc. benefit vastly from this price movement. India is infact now supplementing for lost tax revenue (by its stupid overreactive policies) by increasing petrol prices.
The only ones who lose are countries like Russia and those in the Middle East that rely hugely on oil/gas, and perhaps the US, partly due to the Shale oil bankruptcies, but I imagine, vastly more, due to the weakening of the petro-dollar, esp. in a time of unhinged money-printing.
I honestly don't understand. Is this a "people in tech are rich" type of thing?
Can anyone point to any resources that provide a good introduction to the bankruptcy process in the US?
The ability for ownership to exist separately from the "operating" company, for the owners to only be liable up to losing their investment, not more, and for the management and employees not to directly lose money is sorta the "why" for corporations to exist.
It’s why bankruptcy, specifically, restructuring exists.
Lots of countries don’t have restructuring codes. When their corporations go bankrupt, the assets automatically go to the creditors and/or are liquidated.
It's often a more messy process than this, but there's no reason a company going through bankruptcy would necessarily be impacted in any way aside from an ownership change.
https://en.wikipedia.org/wiki/United_States_bankruptcy_court
But people don't talk about the fact that the opposite can occur with industries.
Petroleum has ridden huge economies of scale to the point their refining facilities are massive, their transport ships are massive... and there is bloat.
But more importantly, most of the cheap extraction oil is gone. The current economies of scale were keeping shale/tar sands extraction with terrible EROEI profitable. But a contraction in demand makes those unable to be used. A compression in demand will make refineries less profitable, and tankers less profitable.
And this is a cycle of destruction, just like economies of scale boosting rising technologies is an enhancing feedback cycle.
Oil and Gas is going to be rocky fall down a steep mountain.