Tuesday, December 16, 2008

Goldilocks Oil?

The next time you're filling up your tank and chortling about how great it is to pay $1.57 for a gallon of gas again, you should keep in mind what the long term consequences of falling oil prices are (WSJ-sub req):

As oil and gas prices fall, drilling activity in the U.S. is slowing more than expected, battering shares of drilling companies, hurting economies in energy-producing states and sowing the seeds for supply shortages when the economy recovers.

In its weekly accounting, Baker Hughes Inc. reported Friday that the number of drilling rigs working in the U.S. had fallen to 1,790, down 12% from the September peak and down 2% from the same time last year. It was just the second time the weekly report reflected a year-over-year decline in the past five years.

Most industry analysts now expect hundreds more rigs to fall idle by the middle of next year. Some industry experts suggest a drop of as many as 1,000 rigs, which would represent a 50% decline from the peak set in September. That would leave fewer rigs running than at any time since 2003.

Big deal, right? So a few oil towns and oil companies go bust. They lived high on the hog the last few years and now they're facing tough times. Why should I care?

Because the economy will eventually recover. And with the recovery will come rising demands for oil and gas. Demands that will outstrip the supply which is currently being cut back.

Industry executives, however, warn that restoring production takes longer than cutting it. That means the drop-off in drilling activity could lead to supply shortages -- and rapidly rising prices -- when the economy recovers.

"This sets up, I kind of think, the mother of all price recoveries," Chesapeake's Mr. McClendon said.

And the mother of all pain at the pump. During the last boom in demand for oil we reached a peak of around $4 for a gallon of gas. The next boom will likely result in an even bigger swing and we could easily see $6 or $7 a gallon.

I don't pretend to have a clue what the answers are, but it's once again becoming clear that stability in oil prices would be better than the current boom/bust cycles that are being repeated in ever shorter time periods.

UPDATE-- Dave e-mails with a question:

Your post about the shuttering of so many oil rigs popped a question in my head? Since working on an oil rig is a skill and training intensive job, will the Dem Congress set up a job bank to keep those workers on the payroll until they can be put back to work?

Call me crazy, but I have a hunch that the Dems won't be putting together a bailout for "Big Oil" anytime soon. For some reason the legions of well-paying jobs generated by the oil and gas industry don't sound as sexy to Democrats as the millions of "green jobs" they promise to create by spending billions of taxpayer dollars. The only real specific "green job" that I've yet heard mentioned is light bulb changer at government buildings. Get your apps in now.


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