Wednesday, February 22, 2012

Have the gas companies fracked themselves over?

Profits for the biggest U.S. energy producers including Exxon Mobil Corp. (XOM) are poised to decline the most since the financial meltdown of 2008-09 as the drilling technique known as fracking collapses natural gas prices.

Exxon and Chesapeake Energy Corp. (CHK), which today reports 2011 earnings, will see net income in 2012 slide about 8 percent and 10 percent, respectively, according to the mean of analyst estimates compiled by Bloomberg. That would be the biggest drop since 2009 for the companies, the largest U.S. gas producers.

While higher global demand for transportation fuels has driven up crude prices 32 percent since 2009, the domestic gas glut is pinching earnings for producers even as it pushes the U.S. toward energy independence. Especially hurt are Chesapeake and ConocoPhillips (COP), which amassed gas assets before the full impact of fracking on supply growth was apparent, said Michael McMahon, a managing director for energy investments at Pine Brook Partners LLC, a private equity firm in New York.

“Fracking has opened up vast areas of development on a scale that’s practically overwhelming for the industry,” said William Dutcher, president of Dutcher and Co., an Oklahoma City- based operator of 1,300 oil and gas wells.

Oil output from U.S. fields including in shale rock is at a nine-year high and gas production hasn’t been this robust in almost four decades, Energy Department figures show.

“Shale has driven the gas price down to where it’s creating economic hardship for producers, especially those that made acquisitions in 2006 and 2007, when gas was so expensive,” Dutcher said.

Oil is touching $105 dollars a barrel because of unpredictable nuclear outcomes in Iran, gasoline prices are forecast to be $4 -- or even $5 -- a gallon by May, and yet the tar sands crude everyone wants to ship by pipeline from Canada to Houston and Port Arthur for refining will be sold to China because the US doesn't need it. We're drill, baby, drilling everywhere ... and it turns out the drillers are losing money because of it.

This might be the one thing that stops -- or at least slows down -- fracking in its tracks: the same capitalist pig-faced greed that drove them wild in the beginning is now bleeding them white.

Couldn't happen to a nicer bunch of vampires.

Update: Still wondering why gasoline prices in this country are rising when demand is dropping? It's not demand in China; it's the speculators.

While tension over Iran has ratcheted up over the last few months, the price of oil and gasoline has leaped far beyond conventional supply and demand variables. Financial speculators are piling into the market, torquing the Iranian fear factor into ever-higher prices.

"Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation," said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. "I still remain convinced oil prices are inflated."


What should the price of oil be if left to conventional supply and demand market fundamentals? Canada's the largest supplier of imported oil to the United States, which now actually produces more than half of the oil it consumes. Production and delivery costs for a barrel of oil from Canada are about $75 a barrel. The market-fundamentals cost for a barrel of oil is in that ballpark; above that, speculation sets the prices.

"It's as simple as that," said Gheit, who has testified before Congress and called for regulatory limits on speculation in commodities markets.

Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it's almost the reverse.

You should of course also laugh out loud when some dumbass conservatives blame Obama. If Republicans were concerned about high gas prices then they would say something to their oil buddies about them.

But they would rather screw America in hopes of winning an election.

1 comment:

Matt Bramanti said...

Isn't this exactly what's supposed to happen? Increased supply leads to lower profits and reduces economic rents. Fine by me.

Also, I haven't seen any evidence that "the drillers are losing money because of it." What did you mean by that?