Kemp: U.S. Economy Slows Sharply as Oil and Gas Slump Deepens

Lance Brofman  |  February 01, 2016

There are two schools of thought regarding the future direction of oil prices. The geopolitical approach is that major producers such as Saudi Arabia and Russia will keep flooding the world oil market precluding any recovery in oil prices in the foreseeable future. The other approach regarding the future direction of oil prices is based on fact that all oil and gas production in any period is the result of previous exploration and production capital expenditures. Since all oil wells deplete, albeit at widely varying rates, no drilling today eventually results in no oil at some future date. This approach is taken in our article: Will Oil Production Fall Off A Cliff? http://seekingalpha.com/article/3793456-will-oil-production-fall-off-a-cliff In that article, we utilize macro models to relate world oil prices to exploration and production capital expenditures. We then utilize macro models to relate world exploration and production capital expenditures to oil supply. The word cliff with regard to future oil supply refers to a situation where the decline in oil production resulting from the ongoing reduction of exploration and production capital expenditures will not significantly impact total supply for a while due to the enormous amount of oil stockpiled in storage tanks, ships and drilled but uncompleted wells. In the way that cartoon characters like Wile E. Coyote and the Road Runner run off a cliff and seem not to fall for a while, but then drop precipitously, when the stockpiled oil runs out, the reduced production will cause effective total supply to plummet. There was an old rule of thumb that it takes $20 of exploration and production capital expenditures to produce a barrel of oil. Like all such generalizations, the actual relationship between exploration and production capital expenditures to barrel of oils produced varies greatly. However, by most accounts, the decline in oil prices in recent years has reduced exploration and production capital expenditures by at least $200 billion below what would have been the case, if oil prices had not declined. Land based oil drilling rigs in the U.S. have fallen from a peak of 1609 in November 2014 to about 550 at the end of 2015. Clearly, in order for any oil to be produced an oil rig must first drill a well. Thus, oil production in one period is a function of exploration and production capital expenditures in prior periods.... http://seekingalpha.com/article/3802226-swift-energy-and-sandridge-energy-speculative-ways-to-bet-on-oil-prices