Thread by @thechrisbuskirk

Short thread on oil prices:
The headlines about negative oil prices yesterday & today are at once informative (sort of) & misleading.

The big story is the chart below *not* that the price of WTI went red for two days. That’s an anomaly arising out of a contract expiry and...1

Lack of storage capacity at Cushing, OK where the contract specifies buyers take delivery. The negative price may also have to do with the implosion of Hin Leong a Singaporean oil trading firm.

The real story is the pricing of oil futures for the next 2+ years. It’s not good.

In fact it’s a bloodbath for the US oil industry. June futures are priced at $14/barrel. They rise steadily getting to $30 in December ‘20 & $35 in December ‘21.

That pricing will destroy the US shale oil business & with it hundreds of thousands of high paying jobs. /3

The Dallas Fed did a study that estimate the break-even cost of drilling a new shale well averaged ~$50/barrel across multiple basisns. At these prices there won’t be any new wells drilled for quite awhile. That’s a lot of jobs gone.

What about existing wells? /4

That’s harder to gauge. There’s a lot of sunk cost. So what’s the average marginal cost of pumping a barrel of shale oil? It’s varies by producer, age of well, which basin, etc, but it’s not $14.

Folks I’ve spoken to in the industry say ~$30 is a decent rough avg with some /5

Significant variation. So maybe by the end of this year prices are back to where a portion (but not all) of the American shale industry can run its existing wells at break even. But no new drilling. And at some point existing wells with higher /6

Marginal costs are going to get capped. That’s going to be an expense to a company that is probably already losing money. And btw, restarting those wells is an expensive proposition. There’s not an on/off switch.

All of this points to a lot of pain & billions in losses in /7

The US oil patch which has been one of the real bright spots in the 10 year economic expansion that just ended. The US not only became oil independent but a net exporter of oil for the first time in decades. That’s over for now. And with it will go a lot of jobs that have been /8

Among the best paying new jobs of the last decade. This means pain for middle America (literally the middle of the country and also the middle class) and also lots of losses for investors in & creditors to the oil patch. It also benefits major state oil producers like Saudi & /9

Russia. They have lower marginal costs and more staying power through a tough multi year pricing cycle.

This thread is meant to be descriptive rather than prescriptive but a strong, healthy US oil sector is necessary to any economic recovery. How does that happen? /end