PeakTrader.com

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PeakTrader:

The price of domestic oil is over $90 a barrel and the price of international oil (Brent crude) is over $100 a barrel, although the U.S. is in depression (with only 2% real growth expected in 2013), the E.U.-17 is in recession and depression (projected zero real growth in 2013), and China is slowing (perhaps below 7% real growth, to create instability in its bubble economy that needed “creative-destruction” over a decade ago).

When economic growth accelerates, rising oil prices should raise domestic oil production even more, although higher oil prices will slow GDP growth.

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Vangel, debt is cheap. So, why use equity? Also, depreciation expense reduces taxes. Typically, the faster the depreciation expense, the better.

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Vangel says: “Cannot self finance their projects without issuing new debt, dilute shareholders through the issuance of new shares, or selling off assets that have some value.”

Most firms cannot self finance. Perhaps, when shale oil firms expand, they issue little new debt or equity and don’t have to sell-off (undervalued) assets.

The boom or expansion in shale oil production is new and ongoing.

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http://www.aei-ideas.org/2013/05/americas-energy-revolution-is-taking-us-from-resource-scarcity-to-a-new-era-of-resource-abundance/#comments

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PeakTrader:

Vangel, how do you know shale oil producers aren’t plowing back all their profits or cash to fuel, or even accelerate, the oil production boom?

Production costs will decline (with advancements in technology and improvements in labor productivity) and stronger economic growth may cause oil prices to rise sharply.

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Vangel, given shale oil production is booming, and seems to be accelerating, once the expansion slows, costs (in this high-paying capital-intensive industry) will drop like a rock.

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Vangel, your charts don’t explain anything.

If expansion of oil production stopped, profits would rocket and cash flow would turn hugely positive, because the enormous costs of new wells, equipment, labor, etc. would also stop.

Depreciation would continue to reduce existing expenses and taxes, until the assets are fully depreciated.

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Also, I may add, if only 25% of the asset has been depreciated, the implication is its useful life has 75% more to go. So, the asset won’t have to be replaced, to cause an expense.

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http://www.aei-ideas.org/2013/05/shale-oil-boom-spreads-to-wyoming-colorado-new-mexico-utah-and-oklahoma-combined-output-up-46-in-3-years/#comments

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PeakTrader:

A NeoClassical or NeoKeynesian economist would note subtle differences between export taxes and export restrictions, e.g. revenue flowing to government or raising domestic consumer surplus, negative externalities between producing oil & gas and another good, production as a residue of producing another good or producing a primary good (production may not fall much if producers sell at a lower price or receive less revenue from a residue good), etc..

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It seems, to export natural gas, pipelines need to be built to send it to a facility and convert it to liquified natural gas (I heard, one facility would cost $10 billion to build). Then transported, e.g. to Europe or Japan.

If natural gas is $5 in the U.S. and $10 in Europe, then through trade, the price may equalize at $8 (after conversion and transportation costs). The U.S. will be investing and working to reduce natural gas prices by $2 in Europe.

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Of course, after investing in pipelines and facilities, U.S. shale oil producers will profit from natural gas too:

Bakken’s top producer wants to snuff out natural gas flaring
3/4/2013

“Continental Resources Inc., the top producer in the Bakken Shale, plans to reduce natural gas flaring from its well sites to “as close to zero percent flaring as possible.”

That announcement may have been lost behind the company’s towering profit numbers; Continental reported net income of $739 million for 2012, a 72 percent gain versus 2011.

It is no secret what brings drillers to the Bakken, and it’s not natural gas. But as companies draw oil from the Bakken’s huge reserves, gas bubbles up, too.

In the remoteness of the Williston Basin, drillers often have nowhere to put this otherwise valuable commodity. So they burn it, lighting up the North Dakota sky.

Midstream companies have committed some $4 billion in pipeline and processing projects, to collect, modify and move gas.

They laid some 2,300 miles of pipe in 2011. The figures for 2012 aren’t out yet, but he believes they could be even greater.

Given the iron-clad economics of the Bakken, it (natural gas) amounts to a cherry on top.”

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Ron, I reject your oversimplified beliefs. For example, if you’re an American, you benefit from lower interest rates (compared to Europe), lower prices, fewer negative externalities, and consuming more in the global economy than producing.

Moreover, there are differences between normal goods and also differences between a normal good and a “residue good.”

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There are many other factors you continue to ignore. However, using only a supply-demand model, the world price of natural gas will fall with free trade, because of an increase in supply, although the domestic price will rise.

One way to look at it is with free trade, the global economy may gain $2 and the U.S. may lose $1. With some restrictions on free trade, the global economy may gain $1 and the U.S. loses nothing.

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That may be the case with natural gas (for reasons I stated above), and not the case with almost all other goods.

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http://www.aei-ideas.org/2013/05/106521/comment-page-1/#comment-280629

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